Layoffs and the Perpetual Job Paradox

Everyday we hear the news of more layoffs everywhere. Perhaps even within the company you work for. Most of us take it as a big shocker.

Lets think about that for a moment. When you got hired by your company did they guarantee a job for perpetuity? Did you assume you would work there until you retired? My friends jobs are only temporary and they should be treated as such.

Most workers treat their current jobs as a never ending source as cash flow (see my post about redlining it). That's why most advertisers get you by pricing items as X $ per month. Oh yeah, I can afford it because every month I make $xx.

More so, since most believe their current job will never end then there's no need to sharpen your skills or stay current. Many long time corporate employees have found themselves out of work and obsolete in the market because of this thinking. Contractors on the other hand usually keep up with their skills and stay current with the market because they know their current gig will end soon.

If you assumed that your current job would end within a year what would you do different? Would you make learning new skills a priority? Would you handle your finances differently?

Your Business Plan Sucks!

Whether consciously or unconsciously you have been sold on a life/business plan all along. You have been getting subliminal messages the whole time and you might not have even noticed. My friend, you were giving a life/business plan and it sucks!

Don't believe me? If you are like the vast majority then you subscribe to the following life/business plan:

1. Get a job and start working as soon as you graduate college (or high school)
2. Keep working every day of life (except for two to three weeks vacation) until you are 65/67.5 years old or until you die, whichever comes first.
3. Once you reach that magical age you "retire" and finally start enjoying life

Sound familiar? It should because that's what your plan is and that's how you live your life and manage your finances. If you're like the vast majority every major financial decision is based on that life plan and the thought process goes something like this:

Can I afford it? That is, if I break this purchase into monthly payments and add it to all my other monthly bills will my salary be able to cover it? After all, I'll be working everyday of my life until I'm 65/67.5 so why not treat myself. I "deserve it".

Have you ever even considered the possibility of not working? We live our lives assuming we are a perpetual cash flow producing machine. That's why we redline our finances to the max because there will always be another check next month.

Try this plan on for change: "I will only continue to work for the next five years and I plan to live well beyond that". Will this assumption change any of your financial decisions? Will it cause you to reconsider your career decisions? If you were only allowed to work for the next five years what would you do?

I know it sounds crazy that you could just stop working after five more years. That's because you bought into the perpetual work life plan a long time ago. You cannot yet conceive it but consider that it can be done for a moment. Entertain the idea in your head that you will only allow yourself to work for another five more years and after that the cash flow somehow will still keep going. Now sit back and relax and pay attention to the ideas that will start coming up in your head as to how this would be possible.

I will go more in depth on this subject in further posts but for now just let your subconcious bounce around that idea for a while. Consider the possibility and let your mind freely explore how you could pull this off.

The Map for Success

Tony Robbins introduced me to the concept of modeling. If there is something you want to achieve then find someone else who has already achieved it and model after him/her. Modeling will shortcut your learning curve and give you a template for how to achieve a particular goal. Modeling provides you a map to follow. The map will show you how to get from point A to point B in the shortest time, shortest distance, etc. Without a map you’d would have to experiment and through trial and error you would eventually get to your destination.

If you were to land in a city new to you a map would be very helpful. A map of the wrong city would be disastrous however. If you land in New York city and you’re reading a map from Detroit then no matter how fast you drive you’ll probably never get to your destination.

We all have a magical destination of where we’d like to be in terms of wealth, career, finances, etc. We’ll call this destination Disneyland. If you want to go to Disneyland you need to find someone with a map to Disneyland. Someone who’s never been to Disneyland would probably not have the map and give you wrong directions. It would be pointless to ask someone who’s never been to Disneyland to give you directions to it.

As obvious as this appears to be we seem to do it wrong all the time. Who do you get your personal finance guidance from? Your brother? your uncle? your coworkers? Well let me ask you, is your brother, uncle, or coworker in Disneyland? Are they in the financial nirvana you would like to achieve or are they as broke as you are?

I see it all the time. “My brother/uncle/coworker told me real estate is going up/going down/going sideways”. “He/she said it is a good/bad/terrible time to invest in real estate”. Yet if you ask your “expert” advisers you will probably find they’ve never done any real estate investment.

I know I know, you’re smarter than that. You get your financial advice from Money magazine, Yahoo, etc. I mean Money magazine surely has expert tips on how to get wealthy right? Let me ask you again, are the reporters/writers of those magazines in the financial nirvana you would like to be in? Are they wealthy? Or are they just in the rat race like you? Do you know people that follow their advice and are they in Disneyland or well on their way there?

Choose your mentors wisely. If you want to go to Disneyland find someone who’s been there and ask them for the map. It is only when you have the right map that you can truly make progress towards your goal of getting to point B.

Redlining your Home Finances

Have you ever revved up your car in first gear (or 1 on automatic) until the rpm gauge went all the way to the red? It was fun wasn't it? You probably experienced great acceleration and the thrill of the engine noise, even though you weren't really going that fast. Revving your car all the way to the red produces tremendous acceleration and it is at that point that your engine produces its maximum horsepower. However, you can't hold that for long because the engine will wear out and it will overheat or blow up.

Well I bet that you're probably doing the same thing to your finances. If we call your take home pay 100% then your financial gauge is probably all the way in the red at 90, 95 or even 105%! If you were saving 50 to 60% of your take home pay then your financial gauge would be running at a nice and sustainable 40 to 50%. But you're not aren't you?

My friend you are probably overheating your financial engine. When you were single you had one income and you managed fine. Then you got a married and became DINKs (dual income no kids). Your financial engine got about twice its horsepower over night. However, within a few months you revved your lifestyle from 50% to probably 80%. Then came the kids and now you really put the pedal to the metal at 90+. The last time you got a raise you just stepped on the accelerator to maintain your neckbreaking 90+% pace.

If you save 50% of your income every year or even 15% you would have no choice but to be wealthy. Lets assume on average you make $60,000 a year and you save 15% or $9,000 a year, $750 a month. In 10 years you should have at least $90,000 in the bank. Actually with compound interest assuming a 10% return you should really have close to $154,000. Did you do it? Do you have it? I don't want to give you the 20 years figure because I'll depress you.

You'll come up with a thousand excuses of why your situation is different and why you have no choice. Think again. It took you many years to get up to your current lifestyle speed so don't expect to brake on a dime. However you can slow down considerably and not notice much of a difference. That 3,000 sq. ft. house might seem like a necesity but many families manage to get by on 1,200 sq. ft.. Some families with two kids can actually fit inside of a Toyota Corolla so don't think that huge $40,000 SUV in your driveway is a necessity either.

If you have saved at least 15% and your rate of return is at least 10% annually congratulations, you are the very small minority. The rest of us have been driving an overheated financial car.

Don't pay off your house

This is somewhat of a controversial statement and it is not for everyone but bear with me and I'll explain to you why.

Your home is probably your biggest source of equity. When you bought your home you probably put down 5, 10 or even 20% down. If it has been a few years since you bought it then appreciation has probably given you free additional equity. Furthermore If you have been diligent you have been sending extra payments to principal to pay if off sooner, very commendable. These three forces combined have probably pushed your loan balance to value to less than 60% (Ratio of what you owe vs. what the home is worth).

Intuitively you might think that the more you lower your loan balance, the more you contribute to principal and the more equity you have in your home the safer you will be financially. However, you would be wrong. The more equity you have in your home the more at risk you are financially.

How could this be? Shouldn't paying off your home be one of the most financially sound and rewarding goals you should have? Well yes and no. Very few people have the financial fortitude to pay off their house. If you can pull it off and you want to get rid of that mortgage you should but not the way you're doing it.

Let us examine the risk with an easy mathematical example. Let's say you purchased a house for $100,000 and you put 5% down or $5,000 so your loan balanace starts out at $95,000. After five years the house has appreciated and it is now valued at $135,000. Also assume that you diligently sent extra payments and your loan balance is now $80,000. At this point your equity is $135,000 - $80,000 = $55,000. Are you safer now than when you just bought it and you only had $5,000 in equity? I don't think so.

What you have in the $55,000 equity scenario is your capital at risk. At risk of what? Life events come to you unexpectedly and you might find yourself one day without a job or without means of generating income for a while. If you call the bank and say "Hey I've been making exta payments to the loan so could you apply that extra money to the next six months of payments because I'm in a bind?" they'll promptly and vehemently deny your request. Furthermore the bank will have a big incentive to foreclose on you because of the equity. If you had to negotiate payment terms with the bank which position would you rather be in: a) with $55,000 in equity or b) with $5,000 in equity? The bank is more likely to negotiate with you in position (b) because they stand to lose a lot money if they foreclose. If the bank forecloses on you in position (a) they'll come out ahead.

Here's a better alternative. Instead of sending extra payments to the bank save that extra money, build an emergency fund and invest it. If you ever have trouble making the payments then you can tap into your emergency fund and save your house and your hard earned equity. If you already have a lot of equity in your house you should refinance and pull out all the equity you can. Then you can take that extra cash out and create your own emergency fund. If you keep growing your emergency fund to the point of exceeding your loan balance then you can pay off your mortgage in one lump sum. Isn't this a better and safer alternative?

Hopefully I have convinced you that having equity in your home is actually a very risky proposition. Taking your equity out and investing it instead of spending it requires discipline but it is well worth the effort. Look for part II of this article to learn an even better reason to not have large equity in your house.